Many people believe that a living trust is set up and completed upon the preparation and execution of the trust documents. That once you have signed and notarized the trust documents, they now have an existing and functional trust.
What most people don’t realize is that the preparation and signing of the documents is only an initial step. In order to make a living trust really work, it must be properly funded.
Otherwise, the creation of the trust becomes an exercise in futility. You may have all the documentation, but the trust does not really function without the assets intended for its use. And if the unexpected happens and the settlor passes away, the intended-trust properties will simply end up going through probate all the same.
If you are currently looking into how to create a living trust in California, this is an important step of the process. The proper funding of a trust is what actually makes the trust operational.
In this article, we take a look at three methods of funding a trust.
Transferring real estate into the trust through properly recorded deeds
For most of us, our highest value assets are real properties. And it does take some effort to transfer real estate to a trust. Instead of Person A being reflected as owner on the property’s title, the title would reflect ownership as “Person A, Trustee of Trust XYZ.”
If the grantor also serves as the initial trustee of the trust, then the control of the property still falls to the grantor, albeit under a different title. Perhaps this is why so many people neglect to finalize the transfer of real estate to a trust – it may seem like it is no big change, at least in terms of the property’s administration.
In order to make the transfer of real property to a trust, California allows for two methods:
- The grant deed; or
- The quitclaim deed
Broadly, the grant deed transfers title with certain assurances such as the absence of liens or encumbrances and assurances of ownership. A quitclaim deed, on the other hand, makes no such assurances, but transfers whatever interest the grantor may have in identified real property to the transferee.
The specific deed selected will depend entirely on the circumstances of each case. Regardless, it is important that the deed must specify who the current owner is, the trustee and the trust, and the exact legal description of the property.
Once the documents are prepared, signed and notarized, they must be recorded. A lot of people often prepare and sign the documents, maybe even have it properly notarized, but neglect to have it recorded. An unrecorded deed may not be considered binding on third parties, which can create a lot of problems for the trust later on, and perhaps even lead to disputes as to ownership – the complete opposite result of a functional living trust.
Retitling Financial Assets and Bank Accounts
There are really only two types of properties that may be used to fund a living trust: real or personal property. As we have seen above, real property transfers have specific steps that must be followed in order to complete a transfer to the trust.
For personal properties, this often involves funding that are deposited into financial accounts.
Typically, for cash accounts, cash is then deposited or transferred into the trust accounts.
The transfer of some personal properties, however, are not so simple. For instance, investment or brokerage accounts, retirement accounts, or business interests cannot simply be deposited.
If the goal is for these properties to avoid probate and fund the trust account, then these accounts must also be retitled to the trust.
The method of retitling is, however, account specific. That is, you would have to contact the financial institution directly, provide all the documentation and transfer instruments they require in order to facilitate the transfer. Each financial institution usually have their own internal policies to follow, but generally may require:
- Documentation regarding the trust
- A copy of the trust agreement
- Properly filled up transfer forms
Business interests may also follow their own protocols for transferring a person’s business interests to another. Deeds of assignment may be required, and several rounds of approval may be needed from the business, whether an LLC, partnership or corporation.
And much as the retitling of real property is not complete unless it is recorded, the retitling of ownership of personal properties would need to be confirmed before a transfer is effected.
It is good practice to follow up with the bank or financial institution and confirm that the ownership transfer has been completed and are reflected in their records, or with a business to ensure that the transfer is also reflected in their documentation.
A lot of people may initiate the transfer or the retitling, provide all the documents and paperwork requested by the business or the financial institution, but never confirm that the transfer has actually been finalized.
All of this is to emphasize that unless transfer is made, finalized, and confirmed, the transfer is not final and complete. The trust remains unfunded.
Updating Beneficiary Designations
For some properties such as financial accounts, insurance policies, 401(k)s, and IRAs, these accounts often have beneficiary designations that transfer on death (TOD).
If your intention is to transfer these accounts to the trust, then the easiest way is to update your beneficiary designation. That is, should you pass away, the beneficiary of the account is the trust. These assets will then be handled according to the terms of the trust.
These may not always be necessary, of course. TOD accounts are not typically included as probate properties, as they pass directly to the named beneficiaries upon the death of the account holder. So if the goal is to facilitate the transfer to your surviving family members upon your death, simply updating your beneficiaries would be sufficient.
However, many people do often neglect to update their beneficiary designations throughout the changes in their life. If you have gone through a divorce, had a new child, remarried, or lost someone, your original beneficiaries may need to be updated. Under certain circumstances, designating the trust as the beneficiary may actually facilitate a more updated list of beneficiaries and a more coordinated and cohesive estate plan.
Pour-Over Wills
Pour-over wills are the safety net for estate plans with a living trust.
You may set up a trust, fund it appropriately, but neglect to include or transfer certain assets to the trust before you die.
A pour-over will is designed to address this gap by essentially “pouring-over” the remaining assets into the will.
However, being a will, it can really only serve as a back-up. Wills must go through probate, and this includes pour-over wills. The transfer of the assets to the trust, therefore, must wait for court approval before any transfer can be made.
Pour-over wills are by no means a substitute for the proper funding of the trust.
***
If you are currently in the process of learning how to create and fund a revocable living trust in California, the services of an estate planning attorney is invaluable. A professional review of your trust documents and an audit of the trust funding helps ensure that your trust is valid and compliant and properly funded.